[ExI] a note on economy of scale

Thu Oct 1 23:21:41 UTC 2026

I don't have our home insurance policy at hand, but I'm pretty sure that is not the case here in Australia:

Gemini:
In Australia, the short answer is no, you generally do not have to rebuild the exact same thing that was there before, but how your payout works depends on whether the insurer manages the rebuild or provides a cash settlement.

Understanding how Australian insurers handle total losses and rebuilds involves several key factors:
1. If the Insurer Manages the Rebuild

If your policy specifies that the insurer will manage and pay a builder to reconstruct your home (which is common), they will typically rebuild a home of "similar standard and quality" to what was there previously, factoring in modern building codes.

    Customization: If you want to change the layout (e.g., turning a closed kitchen into an open-plan living area) or upgrade materials during this process, you usually can. However, you will have to pay the difference out of pocket if the changes increase the overall construction cost.

    Council & Compliance Rules: Sometimes you cannot rebuild what was there because local council regulations, zoning laws, or updated bushfire/flood building codes require a different design or higher-grade materials. Standard Australian policies generally include allowances for complying with current building regulations, but you still must stay within your total sum insured limit.

2. If You Take a Cash Settlement

Many Australian policies give you the option to take a cash payout instead of having the insurer rebuild. If you choose a cash settlement:   

    Total Freedom: You can use the money however you like. You can buy an entirely different property, build a completely different style of house on the same block, or even clear the land and walk away.   

    The "Reasonable Cost" Trap: Insurers are required to pay the reasonable cost to rebuild what was lost. Be aware that cash payouts are sometimes calculated based on what it costs them (using preferred builder bulk rates) rather than what it will cost you to hire an independent contractor, which can occasionally leave you short.   

    Caps and Limits: Your payout will never exceed your total building sum insured. If building a different or larger structure costs more than your insured limit, you must cover the shortfall.   

Key Takeaways

    You have flexibility in how you use your payout or design a new home, provided you stay within your policy’s sum insured.

    Any upgrades, expansions, or premium layout changes that cost more than the original structure's replacement value are your financial responsibility.

    Always check your specific Product Disclosure Statement (PDS), as some policies restrict cash settlement options or have unique rules regarding how they calculate replacement costs.

On Tue, Sep 29, 2026 at 08:48:34PM -0700, spike jones via extropy-chat wrote:
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> > On Behalf Of Brent Allsop via extropy-chat
> Subject: Re: [ExI] a note on economy of scale
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> Wow,
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> Wait, what?
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> With car insurrance, if I don't buy a new car, when it is totalled, I still get
> the value of the car from the insurrance. (My son recently did just that.)
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> So if you don't rebuilt the house, you don't get paid?
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> That’s right, Brent.  Do read your insurance contract carefully, or better yet,
> call your agent, or copy/paste what I wrote into your favorite AI.  Take it
> away, BillK.
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> It’s kinda even worse than what I originally posted, because I forgot to add
> something important: some technologies such as gas heating is out of style. 
> Homeowners want all-electric reversible heat pump HVAC, which is expensive.  If
> a home had gas heating with separate AC, then the insurance company will only
> pay for the system which was in there to start with.  If you upgrade to
> reversible heat pump, the insurance company subtracts the cost of a gas furnace
> and the separate AC from amount they pay.  Reason: you didn’t replace that
> stuff.  You bought something else.  They don’t pay for the new stuff, they
> don’t even contribute to it.
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> I am not exaggerating a bit.
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> Do feel free to past my dismal commentary into
> GPT-whatever-version-we-are-on-now, or your favorite AI.  It will be
> interesting to get it’s take on what I am calling the optical illusion of
> insurance coverage.  We only think we are covered.
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> spike
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> On Tue, Sep 29, 2026 at 9:12 PM spike jones via extropy-chat <
> extropy-chat at lists.extropy.org> wrote:
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>     You can buy a new Honda Accord or Toyota Camry off the assembly line for
>     about 50k, but if you were to get the parts list, buy the all the parts
>     from the dealer, hire an expert mechanic to assemble the thing, you would
>     be damn lucky if you could drive away with an investment of half a million
>     bucks, and even if you did, the car would be not nearly as good as the one
>     assembled at the factory, for your expert mechanic doesn’t have all the
>     special assembly tools they have at the factory.  The factory is banging
>     out a thousand units a day with highly specialized assembly lines, your
>     expert mechanic is building one.
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>     OK then.  Imagine you have a house and you have insurance on that house for
>     as much as the insurance company will allow: approximately its resale
>     value.  Insurance companies are reluctant to insure any house above its
>     resale value for a perfectly understandable reason: they don’t want to
>     incentivize a homeowner to “accidentally” torch his own home for the
>     insurance money.  Furthermore, they avoid incentivizing the homeowner to
>     have an “accidental” fire by writing the contract such that the owner must
>     build back what he had to start with.  If he doesn’t rebuild, the insurance
>     company doesn’t pay.  If he builds something vastly superior to what he
>     had, the insurance company does not pay, for that too would incentivize
>     “accidental” fires.  If the homeowner chooses to not rebuild, but sells the
>     empty lot, the insurance doesn’t pay.
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>     I was not aware of this.    I am damn aware of it now however.  I assumed
>     it was analogous to car insurance, where the company declares your car a
>     total and gives you the depreciated value of the car.  But home insurance
>     doesn’t work that way.  The owner must rebuild the house as it was, to get
>     the insurance settlement.  That’s the only way to get the insurance company
>     to pay. 
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>     However…
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>     If your house burns down, you can’t rebuild it for a cost anything near
>     what it cost to build in the first place, if you live where plenty of us
>     yanks do: in housing tracts, where the homes were built a hundred at a
>     time, which gave the contractor economies and efficiencies of scale.  If
>     you have a tract home which was build 35 years ago and is worth 400k, good
>     chance it will cost about 800k to rebuild it from the ground up.
> 
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>     The insurance company will pay about 400k of that.  When you finish, your
>     new house will be the same design as the original house but everything in
>     it is new, so it will be worth… about 500k.  So you put in 400k, and if all
>     goes well and the contractors don’t overrun or screw up, you might come
>     away with 100k profit, but no guarantee.  You might lose money on the deal:
>     the resale value of the new house might not be enough to cover what you put
>     in, after the insurance company pays their share.  The original builder had
>     economy of scale, you the homeowner do not.  Result: many (possibly most)
>     home fire victims will not be able to rebuild or will judiciously choose to
>     not do so.  Result: the insurance company gets out of a lot of expense.
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>     Conclusion: your fire insurance is mostly an optical illusion.  If one is
>     fully insured, one is not really all that much better off than the guy who
>     had no insurance at all.
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>     spike
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